Sectoral analysis of capital structure adjustment: evidence from emerging market

Abstract

Purpose

This paper aims to investigate the non-homogeneity in the speed of adjustment (SoA) of the capital structure of manufacturing companies. It also attempts to study the key determinants that accelerate the speed of adjustment towards the target leverage level.

Design/methodology/approach

Using the dynamic panel fraction (DPF) estimator on the partial adjustment model, the study captures the heterogeneous SoA of 2,866 firms across eight prominent sectors of the Indian manufacturing industry from 2009 to 2020. To ensure robustness, the empirical inferences of DPF are cross-verified with the estimates of panel-corrected standard errors (PCSE).

Findings

The authors find a combination of the capital structure's slow, moderate and rapid adjustment speed along with the relevance of trade-off theory. Interestingly, the lowest and fastest SoA is recorded by the dwindling textile sector and expanding food and agro sector, respectively. Profitability, firm size, asset tangibility and non-debt tax shields are the key firm-specific parameters that impact the SoA towards the target.

Originality/value

Availing the rarely employed estimator ‘DPF’ and the objective of documenting diverse and non-uniform adjustment speeds across the Indian manufacturing sectors marks a novel addition to capital structure literature.

Citation

Hegde, A.A., Panda, A.K. and Masuna, V. (2023), "Sectoral analysis of capital structure adjustment: evidence from emerging market", Journal of Advances in Management Research, Vol. 20 No. 5, pp. 801-820. https://doi.org/10.1108/JAMR-09-2022-0196